BMO’s ratio of allowances to trailing two-year net write-offs fell to 87% from 102% in the first quarter, their lowest level since 1996, he noted.

In addition, its structured investment vehicle exposure, which now totals $7.9-billion in funding/commitments, could “very likely pressure earnings and capital in the coming quarters, as assets are currently valued at a $1.9-billion discount to commitments," he said.

The recent outperformance of the bank’s share price also has it trading at 6% premium to its peers, and its highest level since October 2007.

Mr. Smith said:

Based on its premium valuation, ongoing SIV exposure, and the inadequacy of the bank’s allowance levels, we are reducing our investment recommendation on BMO.

He maintained his C$32 price target, but reduced the stock’s rating from a “hold” to a “sell.”

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